Doubts rise over Yahoo’s spinoff plan, raising specter of proxy war

SAN FRANCISCO (AP) — Internet pioneer Yahoo, under pressure from unhappy shareholders and desperate to avoid a huge investment-related tax bill, will break itself apart — just not in the way it had previously planned.After scrapping long-held plans to spin off its valuable stake in Chinese e-commerce provider Alibaba Group Holding Ltd., Yahoo is now considering bundling the rest of its assets — including its Web business and stake in Yahoo Japan Corp. — into a standalone company. Yahoo said December 9, 2015 it would seek a “reverse spinoff” that would separate the Internet company’s core operations from its holdings in China’s online giant Alibaba.

If Yahoo presses ahead and jettisons the core business, that would give investors a clearer value of those assets, and could make it easier for any suitor to decide whether to make a bid. The stock was getting hammered amid concerns that spinning off the Alibaba stake — worth more than $30 billion — would involve a tax bill that could exceed $10 billion. But the creation of a new entity – which Yahoo said would take a year or more to conclude – will likely take Mayer’s focus away from turning around the Internet business. “Pursuing another version of the spin-off is just another excuse for the board of Yahoo to not concentrate on reviving its core business,” said Brian Quinn, a professor at Boston College Law School. “They (Yahoo) strike me as too distracted by financial engineering.” Mayer’s efforts have so far had little tangible effect. Some investors were also getting fed up with the company’s inability to generate sales growth since Marissa Mayer took over as chief executive officer in 2012. “A separation from our Alibaba stake, via the reverse spin, will provide more transparency into the value of Yahoo’s business,” Mayer said in a statement. But the tech firm stuck by its intention to separate out its activities under the new structure, a move that could open the door to a sale of Yahoo’s core online operations amid speculation the group may be headed for a break-up.

Board chairman Maynard Webb said during a conference call that “there is no determination by the board to sell the company or any part of it,” and added that Yahoo is “tremendously undervalued.” Asked on CNBC if the board retains full confidence in Mayer after her three years at the helm, Webb said: “Absolutely… I’ve never met anybody that works harder, that’s smarter, and cares more.” When asked if Yahoo would entertain an offer to buy its online operations, Webb told CNBC that Yahoo’s board would have a fiduciary duty to consider it. FILE – In this Jan. 7, 2014, file photo, Yahoo president and CEO Marissa Mayer speaks during the International Consumer Electronics Show in Las Vegas. But he told the New York Times that if a bid were to emerge, “it would probably be a lowball offer.” Some reports say there could be interested buyers for some Yahoo assets, and Verizon’s top executive this week suggested the telecom giant may be interested in parts of Yahoo that could fit with its newly acquired AOL unit. The pieces of the business with less appreciation should get picked for any spinoff, he said. “This makes unbelievable sense,” Levine said. “The original spinoff as structured would work, but they were taking on more risk than necessary.” Investor’s didn’t cheer the move. The plan, expected to sharply cut back some of Yahoo’s operations and likely reduce the workforce of some 11,000, would create “greater transparency to ensure that Yahoo’s business operations are accurately valued,” Mayer said.

The new plan will require Yahoo to win the consent of a large cast of players including regulators, shareholders, bondholders, business partners and others “too many to name,” Chief Financial Officer Ken Goldman said on the call. The company approved a proposal earlier this year to create a new holding company for the Alibaba assets, a plan designed to be tax-free for shareholders. Yahoo’s board convened last week to consider options for the company’s future, including whether to press ahead with the Alibaba divestiture after questions arose about whether the transaction would be tax-free, or selling off the company’s core assets.

Yahoo has struggled to grow its Internet business, which includes selling search and display ads on its news and sports sites and email service, in the face of competition from Alphabet Inc’s (GOOGL.O) Google and Facebook Inc (FB.O). With sales hovering around 2006 levels, investors’ patience had begun to wane, and activist shareholder Starboard Value LP last month called for the company to drop the Alibaba spinoff and instead sell its Web businesses, or face a proxy fight.

Mayer said that Yahoo Japan “is a very important business partner,” but that for the moment “the highest priority is the Alibaba equity stake and we’re focused on that.” With Yahoo hanging in limbo, prospective bidders could emerge for the company’s Internet operations, which Wall Street has been valuing at next to nothing. The essential Yahoo properties could attract a valuation of $3.5 billion or more, depending on the buyer, according to CRT Capital Group analyst Robert Coolbrith. Suitors might include AT&T Inc., Verizon Communications, Comcast Corp., IAC/InterActiveCorp and private equity firms that specialize in buying troubled companies.

Yahoo also announced that Max Levchin, co-founder of PayPal Holdings Inc, was resigning from the board because of the demands on his time, “not due to any disagreement with Yahoo on any matter related to Yahoo’s operations, policies or practices.” (Reporting by Supantha Mukherjee and Anya George Tharakan in Bengaluru, Deborah M. Yahoo’s share of U.S. digital advertising spending is forecast to fall to 3.5 percent in 2017, from 11.5 percent in 2009, according to EMarketer Inc. Mayer said she believes Yahoo’s Internet business in significantly better shape than when she arrived, largely because it is pulling in more traffic and advertising in the increasingly important smartphone and tablet market.

Even so, Yahoo’s net revenue declined by 8 percent from the prior year in the third quarter and an even steeper decline is forecast for the current quarter ending in December. When Yahoo announces those fourth-quarter results next month, Mayer also plans to unveil a shake-up that is supposed to jettison the company’s least profitable products and likely will lead to layoffs.

It will be the latest overhaul of a company that is now on its fifth full-time CEO in the past decade, all of whom have struggled to define what Yahoo’s mission should be. In the backdrop, Yahoo also has had to ward off a hostile takeover bid from Microsoft Corp. and quell shareholder uprisings spearheaded by activist investors Carl Icahn and Daniel Loeb.